Investors are trying to tell Samsung something, will it listen?

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Samsung Electronics – the crown jewel of the Samsung Group – is a cash cow. It is the most profitable company under the conglomerate’s umbrella and yet many analysts and asset managers are of the view that the company’s stock is massively undervalued. Minority shareholder Elliott Associates tried to get this point across to Samsung in a big way last year by sending the company a corporate restructuring proposal which calls for splitting Samsung Electronics into two as well as for taking several short-term steps to swiftly increase shareholder value.

US-based hedge fund Elliott Associates proposed that Samsung Electronics should be split into an operating and a holding company and that the company should pay a one-time dividend of $27 billion from its cash reserves. The proposal was well received as Samsung Electronics shares surged to a new record high after it was made public. I wrote in detail some three months ago about the strained relationship between Samsung’s founding Lee family, which retains control of the conglomerate, and Elliott Associates which owns 0.62 percent of Samsung Electronics. However, I did explain why Samsung was more likely to work with the hedge fund rather than against it in this particular instance.

Samsung gave its response to the proposal about a month ago. While it didn’t agree with everything that the hedge fund had proposed, it signaled an intent to work on increasing shareholder value. The company promised to release around $3.6 billion in dividend payments for 2016. It also committed to returning 50 percent of its free cash flow in 2016 and 2017 to shareholders in the form of greater dividend payouts and share buybacks. Samsung has already been working on a separate plan to increase shareholder value and has spent some $10 billion on share buybacks for this purpose.

Elliot Associates gets to sit across from Samsung Electronics and discuss complex restructuring proposals because it owns 0.62 percent of the entire company. Retail investors don’t have this privilege. What they can do, however, is try to send a message to the company through a different medium. Samsung Electronics shares listed on The Korea Composite Stock Price Index or KOSPI under quote KRX:005930 have been on a wild ride this year. We saw the stock hit fresh highs every few months as investors were happy with the company’s performance. They liked the fact that Samsung’s P/E ratio overtook Apple’s for the first time. P/E ratio is a way of looking at a company’s value by measuring its current share price relative to its earnings per share. It reflects the dollar amount that an investor can expect to invest in a company so as to receive one dollar of that company’s earnings.

Even after the company’s stock took a beating due to the Galaxy Note 7 recall, it was quick to bounce back. Just yesterday, Samsung Electronics shares stormed to a fresh new high as investors are happy with the Q4 2016 guidance that it released a few days ago. Samsung forecasts 9.2 trillion won ($7.64 billion) in operational profit, registering a 76.92 percent quarter-over-quarter and 49.84 percent year-over-year growth. If this estimate is confirmed in the full earnings release then it will exceed market expectations by almost 1 trillion won.

Samsung Electronics share price has crossed the 1.8 million won ($1,500) level and that gives the company a total market capitalization of more than 260 trillion won. However, the stock isn’t as expensive as it should be, given that the company’s annual operating profit is reaching 40 trillion won against a market cap of 260 trillion won. The share price right now is even less than one-tenth of net profit.

The hedge fund told Samsung’s board of governors in a letter last year that the company has “failed for years to deliver proper shareholder value.” Many minority shareholders are likely to agree. Elliott Associates says that Samsung is undervalued by up to 70 percent because of its complex corporate structure and “bottom-tier” shareholder returns which is why it has called on the company to split up and list the main operating company on the Nasdaq in the United States.

Many analysts and asset managers are of the same view that Samsung Electronics is highly undervalued. It’s pertinent to mention here that the company’s stock price has almost never been higher than other overseas companies in the same industry. Since it remains undervalued, many believe that there is quite a bit of room for further climbs. However, like any other publicly listed company, the performance of its stock relies on the performance of its business and this is where things get interesting.

Business is booming for Samsung. The Q4 2016 earnings guidance clearly shows that even if the company loses billions of dollars as a result of its flagship smartphone literally going up in flames, its memory and display businesses will help plug the gaps and then some. Samsung has more or less cornered the market for small OLED displays and its dominance in the DRAM business is taking full advantage of the rising prices. It also goes without saying that not every flagship Samsung sells in the future will suffer the same fate so the mobile division’s contribution to the bottom line will increase considerably in the coming quarters.

Investors big and small are showing a renewed confidence in Samsung’s business months after it suffered a disaster. Even though many started questioning Samsung’s ability to bounce back from the Galaxy Note 7 recall, investors have shown that they have full confidence in the leadership and the health of the company’s business. The stock wouldn’t be surging to fresh new highs if no individual investors, hedge funds, investment banks and other financial institutions were willing to support a higher price level for it.

The message they’re trying to get across is simple. They believe in the company and are satisfied with its performance so far. They are willing to invest in its future because they see room for growth. What Samsung needs to do now is provide them more incentives and the best way to do that is increase shareholder value. That puts more money back in shareholders’ pockets and some of that money is most likely going to end up reinvested in Samsung Electronics. It’s going to be a win-win, the question is, will Samsung listen?

Disclaimer: This is not a call on Samsung stock and should not be taken as one.

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1 year 3 months ago

Nice article. I think Samsung are heading in the right direction. Maybe the advice is good, maybe not. 0.62% gives them the right to make a proposal but not make any decisions. Samsung have got it right for almost 80 years, so I’m sure they’ll do what’s best.

1 year 3 months ago

Is that 0.62% or 62% share for Elliott ??